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In my previous posts on the World Economic Forum’s Global Risk Report 2014, I have concentrated on

the methodology of the report (corresponding to the Plan Risk Management process of Project Management),

the identification of risks (corresponding to the Identify Risks process of Project Management)

and now in this third series of posts, I am concentrating on the next topic,

the qualitative analysis of risks (corresponding to the Perform Qualitative Analysis process of Project Management)

This qualitative analysis is called “qualitative” because it does not fix a specific dollar amount to each risk (that would be “quantitative analysis”), but instead analyzes each risk according to some qualitative variable, usually something like likelihood, severity, and/or urgency

The three questions that the respondents were asked about the 31 global risks were:

Which five of the global risks are of highest concern?

Which five of the global risks have the highest probability of occurring in the next decade?

Which five of the global risks would have the greatest potential impact if they were to occur in the next decade?

In yesterday’s post, I discussed the result of asking the respondents to the survey the second question. In this post, I discuss the result of asking them the third question, on those risks which would, if they occurred, have the greatest impact.

2. RISKS OF GREATEST IMPACT

The respondents were asked to assess each of the 31 risks (these risks are listed on the post dated 02/04/2014) based on the probability of occurrence on a scale from 1 to 7, with a “1” meaning that the risk is not likely to happen, and a “7” meaning that the risk is very like to occur.

Those 5 risks that rated as having the highest probability of occurrence were as follows:

Global Risk

Category

Likelihood

1.

Fiscal Crises

Economic

5.3

2.

Climate change

Environmental

5.2

3.

Water crises

Environmental

5.1

4.

Unemployment and underemployment

Economic

5.0

5.

Critical information infrastructure breakdown

Technological

4.8

Here are some things to notice about these risks.

a. Four out of five risks are highly correlated

Risk #1, the societal risk of fiscal crises, is highly correlated to Risk #4, the economic risk of unemployment and underemployment. The fiscal crisis is the aftermath of the financial crash in 2008-2009, and has left national governments struggling in what is termed the Great Recession. Although the federal deficit in the US has started to shrink, many state governments are still facing d

Likewise, Risk #2, the environmental risk of climate change is connected to Risk #3 of Water crises. For example, in the US, the states west of the Rocky Mountains (like California) are experiencing record droughts. According to the majority of scientists, this water crisis is due to a jet stream called the “polar vortex”, which normally circles the Arctic Circle at this time of year. However, due to climate change, this jet stream has become misshapen and is forcing colder-than-normal air East of the Rocky Mountains and warmer-than-normal air West of those mountains. This is creating the abnormal weather conditions on both sides of the mountains. California is experiencing record droughts while Chicago, Illinois (where I currently live) is experiencing record low temperatures and snowfalls.

b. “Repeat offenders” in list

Risks #2 and #3 related to the environment are both risks that have been in the top five lists of having the greatest impact last year in 2013, with water crises having been on the list since 2012.

Regarding economic risks, the fiscal crises risk was also on the list last year, although it was called chronic fiscal imbalances in 2013.

c. What is missing from the list?

The risk that was on the list last year but was missing this year is the diffusion of weapons of mass destruction, perhaps because of the interim agreement reached regarding Iran’s nuclear program, plus the temporary agreement reached in Syria to halt the use of chemical weapons.

3. COMBINED MEASURE: PROBABILITY & IMPACT

If you take a look at the risks that have highest probability, and those that have the highest impact. Those that are high in both probability and impact are the ones that should have the highest priority.

If you look at the grid that is formed by combining these two dimensions, which is on page 16 of the Global Risk Report 2014, you see the risks which should have the highest priority. If you take a look at the six of these data points with the highest total of probability times impact, you coincidentally get the top six risks as listed by the respondents in terms of the risks that are of highest concern.

You can conclude that these risks are the ones to watch in 2014, and that any funds for risk mitigation would be most profitably be put into measure that would reduce the risk of any of these risks. The fact that risks #1, #2, and #4 are linked, and the fact that risks #3, #5, and #6 are linked is interesting, because it implies two things.

First of all, since they are perceived to be causally linked, efforts in improving one of them might have positive spillover effects on the other linked risks. For example, measures to reduce structurally high unemployment/underemployment, for example, would create jobs that would in turn create demand for products and services. The taxes on these new products and services would reduce the government fiscal crisis, and the demand for labor would also decrease the severe income disparity by raising median wages.

On the environmental side, efforts to mediate the effects of climate change by the reduction of greenhouse gas emissions would in the long run reduce the increase in the average global temperature, which is the mechanism which fuels the extreme weather events such as droughts, which in turn are causing the water crises.

The second observation is that since risks involving the economy and risks involving the environment are perceived as both being of greatest concern, that any efforts to spend money on one set of these risks be accompanied by measures that address the other. Otherwise, your efforts will be perceived as a zero-sum game, and those stakeholders that hold one set of these risks as more important than the other will oppose your efforts. B0th “constituencies”, if you will, need to be addressed in either case.

As an example, measures which improve the economy on a short-term basis, but which will be harmful to the environmental in the long-run, such as implementation of the Keystone XL pipeline in the US, will face more opposition due to the increased awareness of the environmental hazards attached to such a project.

However, it is also true that those who want to cancel the Keystone XL pipeline will have to assuage the concerns of those who will see a lost opportunity for jobs creation at a time when the US economy is in desperate need of the same. Are there economic opportunities to be found in measures which would simultaneously reduce the risk of increased greenhouse gas emissions?

The insight from reading the Global Risk Report 2014 should extend not just to the awareness of those risks that need to be addressed, but also to the way to present those risks to the shareholders (the voters in democratic countries) in such a way as to maximize their acceptance.

The post tomorrow will deal with next topic of quantitative analysis as seen by the authors of the Global Risk Report 2014.